Wednesday, August 18, 2010

Housing and Jobs Are The Key

....which means that the economy is dead.

Usually building permits which lead to housing starts and residential construction employment lead the economy out of a recession.

But its not happening this time around.

Too many homes were built. Easy/fraudulent credit boosted this figure. Millions of these homes sit idle.

Building permits are a leading indicator of future housing starts and doesn't look good.

Now many are stating that both of these charts are in "OVERSOLD" territory. This is simply preposterous. Housing starts and building permits are not like stocks. They don't just bounce because they are oversold. although they do crash like an Internet stock when the booze (CREDIT/LIQUIDITY) runs out.

What these two charts explain to me is that there was a huge irrational credit bubble that started right after the IInternet/Telecom/NASDAQ implosion occurred. It ran right through into the go go CDO's days of early 2006. It is just absurd that the equity markets led by the financials ran up for another year.

So what happens from here? Quite simply as I pointed out above. There are far too many homes that were built during the credit craze that are sitting empty. The housing market needs to stop building new ones because existing inventory cant be sold. This is even in the face of generationally low interest rates.

I have posted before that ever increasing housing starts is poisonous to the recovery.

What ever they are telling you about foreclosures is flat out wrong. Foreclosure activities are volatile and come in spurts. You have to look at delinquencies and that figure is still extremely worrisome. Every single plan by Treasury and the Obama Administration has been a backdoor bailout for the banks. Every scheme hatched out of DC is a grand extend and pretend experiment to keep an insolvent rotten to the core financial system intact.

The housing starts number is not going to reverse course and head higher partly because of existing inventory of new unsold homes and unabated foreclosures. A meaningful decline in the unemployment rate is also extremely unlikely until 2nd quarter of 2011 at the earliest.

I have also stated that the US Economy is suffering structural problems.

Initial claims have reversed course and are headed towards the 500K area. Equity markets are not prepared to see a +500K print. We will see tomorrow with the weekly claims. At this point of the "Recovery", we should be printing well below 400K on initial claims. Usually near the end of a recession, residential employment picks up as the Fed lowers rates, this generally leads to job growth, this leads to housing starts. Its a pro-cyclical, positive feedback loop virtuous cycle. But we are currently in a negative feedback loop cycle as the jobs are just not there.

We have a vicious trap of less job creation, less household formation, and less demand for housing.

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